Understand
your FICO score and how it affects
the amount of money you can borrow
and the interest rate you have
to pay

See
how amortization works by following
an example

To
find out how to download a free
sample loan application, see "Additional
Resources"

The
loan
application
and
prequalifying
is the
first
and
most
important
step
in the
entire
process
of building
your
home.
You
can't
begin
a conversation
with
your
realtor
and
you
can't
discuss
any
plans
with
your
builder
until
you
have
been
prequalified.

Prequalifying
is simply
being
approved
for
your
new
home
loan.
It's
not
all
that
simple,
but
it's
important.
The
amount
you
are
prequalified
for
is the
total
amount
you
can
spend
on your
new
home.

To
do list

Find
a good lender.

Choose
the right loan package.

Get
prequalified for your loan to
know your "dollars
on the dirt."

Find
the land you want and what it
will cost you.

Speak
with several builders to understand
what you can get for your money.

Knowing
Your "Dollars on the Dirt" Before You Begin

The prequalified amount is important because it’s the amount of home
you can buy. When you meet with your realtor for the first time—that is,
if you have one—the first question he or she asks is "How much are you
prequalified for?" If you don’t know, you have to go away, find out,
and come back when you do. (For more on whether you need a realtor, see the
Caution in this section.)

The total amount you can spend includes equity in the home you might be
selling. That equity (the difference between what you currently owe and
what your home can sell for, minus real estate commissions and other expenses)
combined with the amount you can borrow determine the total budget for your new
home, including the land. If you already own the land, that prequalified amount
can then be applied solely to the house. If you don’t already own land and
you’re looking for a good piece of undeveloped property, the following are
the kinds of questions a realtor would ask you to determine what you’re
looking for. These are questions you should answer regardless of whether you
actually have a realtor:

Where do you want the lot to be located?

What school district do you want to live in?

How long a commute to work do you want?

How much acreage and how many square feet of house do you need?

What kind of view do you want?

Do you want to live in a gated community?

Do you want flat terrain?

Have you chosen a builder? Does he include the land in his transaction,
or will it be separate?

If the land is separate, how much do you have to spend on the land and
how much will go toward building your new home?

After you have answered all these questions and determined the type,
location, and amount you want to spend on the land, you can then begin looking
for your property.

NOTE

If you’re buying a tract home, the land is almost always included. When
purchasing a custom or semi-custom home, often the land costs extra and might
not be included. Many times, people buy the land first, and then find a builder
to build on it. You need to make all these decisions before you begin your
homebuilding process.

Assume you have been prequalified, found your realtor (if applicable), and
found and purchased your land. Now you’re ready to discuss building your
new home. When you meet with your builder, all he wants to know is how much you
have to spend on your new home.

His question might sound like the old car-salesperson conversation: You ask,
"How much will this car cost me each month?" and he replies, "How
much can you afford?"

CAUTION

Remember, you don’t always need a realtor to acquire your property. In
many cases, your homebuilder sells you the land as part of the process of
building your new home. If you already have a realtor representing you in the
construction of your new home, your homebuilder is obligated to pay a
commission, which usually gets added to the cost of your new home. Many, if not
most, homebuilders (except for production home builders) don’t build
realtor commissions into their square footage costs. Sometimes a realtor does no
more than contact your homebuilder yet can claim a full commission, which you
pay.

How the Builder Goes from "Dollars on the Dirt" to Your New
Home

The amount you have to spend is the most important answer you can give the
builder during your conversation because it tells him how many "dollars on
the dirt" you have. Here’s how it works:

The builder usually asks a follow-up question, such as what kind of kitchen
countertops you’re looking for: Formica, Corian, solid surface, tile, or
granite. The answer to this question tells the builder what your tastes are. For
example, if you tell him the countertops have to be granite, he knows the
bathroom needs to be tile, the lighting and plumbing fixtures need to be
upgraded, and more floor tile than carpet is needed. If you answer that Formica
is fine, he knows that cultured marble, standard lighting and plumbing fixtures,
and carpet throughout are probably fine.

This single answer indicates to your builder a narrow price range per square
foot he can build your new home for while meeting your expectations. Standard
selects, such as Formica or solid surface, might bring the construction cost
down to $80 to $90 per square foot, but the granite answer might raise the
construction cost to $150 to $160 per square foot or more. Of course,
there’s more to figuring the price per square foot than that, but knowing
the type of countertops you prefer is a great starting point for estimating a
range of construction costs for your new home.

NOTE

See Chapter 10, "Selects and the 5,000 Decisions You Need to Make,"
for more information on standard selects.

Okay, now that the builder knows how much you have to spend and your taste in
kitchen countertops, he looks at your lot size and then says, "Your new home
will have a southern exposure and a three-car garage with metal garage doors.
The exterior will be stucco with architectural features and a tile roof. The
home will be a two-story, 2,800-square-foot Mission style, with solid surface
countertops, tile floors in the kitchen and bath, carpet throughout the rest of
the home, and mid-range lighting and plumbing fixtures. You’ll have
2x6-foot exterior wall construction, with R-19 blown-in foam insulation, an R-32
ceiling, oak cabinetry and stair rails, double-hung and double-pane insulated
windows, two fireplaces, and a designer front door." Then you say "What?
How’d you do that?"

The builder knows what most people are looking for in their new homes. He
knows what he can include in his cost of construction, such as carpet, lighting,
plumbing, fireplaces, and front door. He knows how much you have to spend, so he
simply divides that number by his cost per square foot and then knows the
maximum number of square feet he can build. He can see by the shape and size of
your lot that to get that number of square feet, you have to go up to a second
story. He can get all this information from learning how much you have to spend
and what kind of countertops you like.

At this point, most of your questions and design elements have been
established, at least to begin with. From here, everything is an upgrade or an
add-on. It all gets down to dollars on the dirt.

So now you need to determine your own dollars on your dirt. Before you begin
this process, however, you need to go through a few steps, discussed in the
following sections.

Finding a Lender

The first step is to find a lender. Lenders can come in many forms. You might
want to go back to the lender for the house you’re living in now. If you
don’t have a current lender, you might want to go to the bank where you
have your checking account and credit cards.

TIP

Many builders have their own lenders and can get you a better deal if you use
them (or a penalty if you don’t). Find out ahead of time. Some builders
might even throw in a swimming pool or other perk if you use their lenders.

If neither situation applies, you need to find a lender yourself, which can
be a bank, a credit union, or a mortgage broker. All are good choices, but you
need to speak with a few and find out the details. Here’s where it gets
complicated.

Choosing the Right Loan Package

I don’t have the space in this book to discuss all the possible types
of loans. There are VA loans; Fannie Mae; reverse mortgages for seniors; Housing
and Urban Development’s (HUD’s) home equity conversion mortgage
(HECM); 15-, 20-, and 30-year fixed rate; adjustable rate mortgage (ARM);
interest first; no principal (also called interest only); balloon payment;
employer assisted; energy efficient; pledge assist; and more. Don’t get
scared. When you sit down with your lender of choice, he asks you a few
questions, much as the builder does, and narrows down your choices to one or two
possibilities that are right for you.

At this point, you need to understand what lenders are offering, take notes,
and then shop around for the best deal. There are a lot of variables, so
comparing apples to apples is important. If you already have a trusted lender,
usually he presents the best deal he has available to keep you as his customer.
Even though it’s the best deal that lender has, however, it might not be
the best deal you can find. Check around. Look on the Internet to learn more
about mortgage types and rates. Websites such as PickMyMortgage
(http://www.pickmymortgage.com)
can help you go through the steps of understanding the process.

Getting Prequalified

When you have chosen a lender and a type of loan that’s right for you,
you know approximately how many dollars on the dirt you have and what your
expected monthly payment will be. Keep in mind these figures are estimates and
don’t include taxes, insurance, and homeowner’s association (HOA)
fees. The accurate amount can’t be calculated until you do the
following:

Again, gathering this information seems like a lot to do, but professionals
calculate it one step at a time.

It seems complicated, but when you and your lender/realtor/homebuilder put a
pen to paper and add up the figures, you can quickly determine how much is left
over for the house portion of your project.

To get prequalified, first you’re asked to fill out a loan app
(application). The lender helps you with this document and makes it as painless
as possible. He or she asks you a lot of questions about your financial
background and current financial condition and asks you to sign a release
allowing the lender to run a credit report. (See "Running Your Own Credit
Report" later in this chapter for more information.)

To
do list

Record
the account numbers for all your
credit cards.

Record
the numbers for all your checking,
saving, and credit union accounts.

Gather
information on your address and
work history.

Gather
up your last two federal income
tax statements, your last two
paycheck stubs, and the other
documents listed in the last part
of this section.